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QTS Builds on Success in Atlanta Market

While there were reports that QTS Realty Trust (QTS) was building yet another facility in Atlanta, the company said it is not building new space, quite yet. Company execs discuss the Atlanta market and trends among its customers.

Data center developer QTS Realty Trust has a dominant position and plenty of room to grow in Atlanta. In aggregate, the company has a whopping 1.3 million square feet of space and 100 megawatts of critical power in Atlanta alone. The company operates huge facilities in downtown and in nearby Suwanee. While Atlanta is key to the company, it's also a potential strategic weakness as the company is subject to the market's supply, demand and pricing.

There were some reports that QTS, previously known as Quality Technology Services, was building a new data center in Atlanta. However, company executives say this is false. “We have the land, but with the capacity we have currently, we feel very comfortable that we will continue to grow our business,” said Dan Bennewitz, COO sales and marketing. QTS owns 136 acres of additional land adjacent to data center properties, which can support the development of over 1.6 million square feet of raised floor.

In terms of future space available, Richmond, Virginia presents a huge opportunity. There’s 989,439 square feet available for redevelopment, 450,000 of which would be raised floor. However, only 22,084 is currently under construction in Richmond. Contrast this 100,946 square feet currently being redeveloped in Atlanta.

While QTS’ portfolio consists of 10 data centers across seven states, around 64 percent of its revenue comes from the Atlanta market. Its second largest market, Santa Clara, represents 11 percent of the revenue.

Thinking Beyond Atlanta

A large part of the strategy has been to diversify its revenue away from Atlanta and away from single, big customers. These big customers, along with the Atlanta concentration, are potential strategic weaknesses. It leaves them exposed to supply and demand and pricing in a single market and across individual large customers.

The presence in Atlanta is already substantial. They have 740,000 square feet of raised floor, 40,000 square feet of potential raised floor, and have just under 300,000 square feet left for further development. The 970,000 square-foot QTS Atlanta Metro Data Center is among the largest data centers in the world. Another data center, at this point in time where the company is looking to diversify its revenue, doesn't make sense.

The official stance is the company isn’t building; it has room to grow within its facilities, and does own land for future expansion in Atlanta and beyond. The portfolio consists of 10 data centers across seven states, with 92 percent of its space wholly owned by them. The mega data centers mean it can expand within its facilities on the cheap, but a large part of the strategy is diversifying revenue beyond Atlanta.

QTS uses its scale and expertise in compliance as its key differentiators. Its scale means that it can expand within its facilities rather easily and cost effectively.

The product porfolio includes wholesale and retail colocation as well as managed services and cloud, though cloud currently only makes up a fraction of the revenue. The services are dubbed C1, C2, C3, with C1 being the wholesale customers, C2 colocation, and C3 cloud and managed services. Over 40 percent of its customers use more than one of its 3Cs products. Its product mix is helping to diversify its customer profile, which addresses one potential strategic weakness: individual customers comprising too big a chunk of the revenue. Losing one of these customers can be disastrous to earnings and churn rates. It’s not good to have too few customers comprise too much revenue; it's for this reason it offers a variety of services for companies of all sizes.

For the most part, its product mix is helping to diversify its customer profile. Out of 880 customers, It has only one customer that accounts for over 8 percent of Monthly recurring revenue (MRR) and two that account for more than 3 percent. Over 40 percent of its customers use more than one of its 3Cs products. The big trend is that the lines between wholesale and retail colocation are blurring; QTS is a major participant in the blurring of these lines.

The company also continues to attract customers from outside Atlanta. For C1 (wholesale), a majority of the clients are not from Atlanta, with C2, it’s about an even mix, while C3 attracts a range of customers all over. “We have some of the largest SaaS, Internet, and social media clients as our customers,” said Bennewitz.

While the company does offer cloud, it’s not uses by a large part of its customer base. “Our cloud and managed services are aimed at enterprises that need highly compliant, secure predictable costs, predictability via a multi-year contract,” said Bennewitz. “Our participation in the cloud market is very tiny. Cloud and managed services are 10 percent of overall revenue." Growing this revenue will be key.

Going After The Compliance-Minded

In addition to scale, its other big differentiator is compliance. “We invested in our own compliance office,” said Bennewitz. “It was a big investment. We want to integrate a compliance framework across the organization. Pursuing compliance in silos doesn’t work. So now we have an integrated framework; there’s overlap, commonalities. It differentiates us and helps us.” The company is currently working on FedRAMP compliance so it can better tackle the federal space. The biggest beneficiary of FedRAMP compliance would be its Richmond, Virginia facility. Establishing a bigger presence in the federal space will help to further diversify and strengthen the company.

Total revenue was $177.88 million for 2013, with facilities leased 92 percent with an average annualized rent of $381 per leased raised floor square foot.This was nicely up from 145.75 million in 2012, and the company indicates it's on good pace in 2014.

Customer Trends

"There’s certainly a trend for higher densities, but every customer is different," said Bennewitz. "We can accommodate multiple densities. The flexibility that we bring by being able to offer customers different densities, also means we can offer different levels of reliability." Beyond just Atlanta, the company says the industry will continue to be heterogeneous. "Those that succeed will be able to handle the hybrid environment," said Bennewitz. Diversifying its clientele across its C products going forward will be important.

“The other area where customers are becoming more educated is improvement in latency,” said Jeff Berson, QTS’ Chief Investment Officer. “We’ve been a recipient and a beneficiary of the growth and maturation of connectivity.” The single biggest opportunity for QTS, as well as others, remains the on-premise enterprise. Better connectivity is a major factor in the decision to outsource.

“We really like the Atlanta market, it’s in the top 10 fastest growing, it’s an attractive location in terms of power, skilled labor force and attractive cost of living,” said Bennewitz. Over 75 percent of the Fortune 1000 have a presence in the Atlanta market. QTS has succeeded in not only attracting local businesses, but also raising the profile of the Atlanta market across the country. It is and will remain a key market for QTS, but also a potential strategic weakness if they can’t further spread the revenue mix across other markets.

The company went public in October, and completed an expansion in Atlanta last August, adding 70,000 square feet.